UK puts scope of investment banking up for grabs
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own —
LONDON — Britain has put the scope of investment banking up for grabs. The UK’s Independent Commission on Banking has recommended that lenders be required to “ring-fence” their domestic retail arms from their wholesale operations. But it has deliberately left open the question of where to draw the line.
The ICB’s proposal should make it easier to protect retail banking customers in a crisis. But, state-insured retail deposits aside, the ICB has not said which bits should be protected. Mortgages, credit cards, business loans and even trade finance could be included in the ring-fenced subsidiary. Or they could be lumped together with wholesale banking operations.
To see why this matters, consider Barclays. The UK bank’s balance sheet at the end of 2010 was 1.5 trillion pounds. Its UK insured deposit base was just 100 billion pounds. On a narrow interpretation of the ICB’s thinking, Barclays could take those deposits, matched with an equal amount of UK mortgages, and place them in a separate subsidiary. The bank’s remaining activities would carry on as before.
But now assume the ICB adopts a broad definition of ring-fencing. Barclays’ credit card, corporate banking, wealth management and asset management operations had assets of 140 billion pounds at the end of last year. Even allowing for the fact that some of these are outside the UK, a broad definition of retail banking would force Barclays to ring-fence twice as much of its business.
If this were the case, investors and rating agencies would begin to think differently about the non-ring-fenced businesses dominated by Barclays’ investment bank. They might demand higher spreads on the bank’s debt, and ask Barclays to hold higher levels of capital to reflect the fact that the non-retail part of the business no longer enjoyed UK government protection. In the extreme, shareholders might even wonder whether there was any benefit to keeping the two parts of the business together under one roof.
The question of how to define retail banking, and therefore what is excluded from the government-protected umbrella, is likely to dominate the ICB’s discussions as it prepares its final report in September. The answer will largely determine whether the plan is a minor inconvenience for big UK banks — or a major headache.